Massachusetts Pays Towns And Cities To Zone For Smaller Homes On Smaller Lots

To address its ongoing housing affordability crisis, Massachusetts has taken a multipronged policy approach.

One of the tools added to the state’s legislative toolbox in recent years is Chapter 40Y, aimed at encouraging development and construction of smaller single-family houses, clustered on smaller lots, at a lower price point suitable for younger buyers and renters as well as downsizers and retirees.

The so-called Starter Home Zoning Districts Act, Massachusetts General Laws Chapter 40Y, provides cities and towns with a new financial incentive to create districts specifically for this type of housing.

“There’s no easy answer to solving the housing shortage crisis other than to build more,” said Jennifer Schultz, partner and leader of the U.S. real estate development team at law firm Nixon Peabody. “This solution is a step in the right direction, clawing our way toward success.”

How It Works

The statute provides municipalities with direct payments to zone for as-of-right small homes built more densely on smaller lots. Although site plan review is allowed, no discretionary permit may be required, Schultz said.

“This is intended to allow for additional density, often in cottage-community type campuses,” Schultz said. To be considered compliant with 40Y, a development needs to meet the following three requirements.

First, the homes cannot be larger than 1,850 SF, and they must be built at a density of at least four units per acre.

Second, at least 50% of the homes in a district must have three or more bedrooms. Additional dwelling units, or ADUs, of no more than 600 SF are allowed on any lot with a 40Y home and do not count towards the 1,850 maximum square footage.

Third, each project that comprises more than 12 homes must be affordable below 110% of the area median income, or AMI, whether for ownership or rental. A municipality may incentivize, but may not require, additional affordability.

To entice municipalities to create these kinds of districts, the state leverages two kinds of direct payments, Schultz said.

A city or town can receive $10K to $600K in zoning incentive payments, depending on the projected number of new construction units relative to the amount that would have been produced otherwise under previous zoning.

Municipalities also receive a one-time density bonus payment of $3K for each housing unit of new construction created in a 40Y district.

Green Shoots

To date, three municipalities — Lincoln, Billerica and Hanson — have expressed interest in the 40Y program and are working with the Massachusetts Executive Office of Housing and Livable Communities, Schultz said. However, no 40Y districts have been approved as of July 2025.

“These municipalities should be applauded and all efforts supported,” Schultz said. “But there is more to do.”

Massachusetts is currently estimated to need 222,000 new housing units by 2035 to keep pace with demand. 

The state ranks sixth from the bottom in terms of annual new housing production, according to a Construction Coverage study published in October 2024. In fact, it averages only 4.4 new units per 1,000 existing units, compared to the top 15 states, which produce three to five times more.

“The type of housing units that 40Y zoning incentivizes is even more critical in Massachusetts with the housing shortage hitting the early workforce and the ever-increasing downsizing baby boomer population most acutely,” Schultz said.

That’s because housing cost growth for both rentals and for-sale units has far outpaced wage growth in Massachusetts, making it difficult for young professionals to afford to live in the Commonwealth.

“This is driving an outmigration of talent and triggering an economic development crisis on top of the housing crisis,” Schultz said.

From an income perspective, retired and retiring seniors are finding themselves in a crisis not too dissimilar from young professionals, she added.

“This population, entering a lower fixed-income stage of life, expresses a desire to stay in the same bedroom community they have always lived in but without the property tax burden and carrying cost of a several-thousand-square-foot home and several-acre property,” Schultz said. “The solution is often a small rental home in a managed community.”

Both populations could be served by 40Y, she said.

Cape Cod As A Jumping Off Point

The municipalities of Cape Cod, particularly those on the inner Cape, are good candidates to leverage 40Y as a policy tool, Schultz said.

“Decades of restrictive local zoning have prevented Falmouth and other inner Cape towns from building enough housing to support their workforce,” she said. “The result is population decline, especially among younger residents.”

The 40Y zoning tool provides a path forward by making it easier to build small-scale homes in appropriate areas without lengthy and uncertain permitting processes for developers, Schultz said.

These districts will allow for infill development that supports local businesses. The approach also aligns with regional planning goals of open space and water resource protection rather than sprawling subdivisions that require more vehicle use, she added.

“The housing supply for a year-round workforce can be increased in a manner that complements small-town character,” Schultz said. “It also offers a choice for those who want to retire on the Cape in a walkable community attainable on a fixed income.”

To be sure, there are many hurdles facing housing developers today, both in Massachusetts and across the U.S. They include the high cost of debt, access to equity, high cost of labor and materials, ever-increasing affordability requirements, stringent new energy codes and out-of-date building codes, Schultz said.

“But there is no legitimate downside for municipalities, of which there are 351 in the state, to passing 40Y districts,” Schultz said. “Towns and cities can add money to their budgets immediately from the state’s payments and set themselves up for longer-term success by attracting and retaining the ‘missing middle.’”

This article was produced in collaboration between Studio B and Nixon Peabody. Bisnow news staff was not involved in the production of this content.

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